C O N F I D E N T I A L SAN SALVADOR 001364
SIPDISE.O. 12958: DECL: 12/12/2028
TAGS: EFINPGOVECONES
SUBJECT: GOES LIQUIDITY PROBLEMS, LOANS AND CREDIT LINES
REF: A. SAN SALVADOR 1353
Â¶B. SAN SALVADOR 1332
Â¶C. SAN SALVADOR 1238
Classified By: AMBASSADOR CHARLES L. GLAZER, REASONS 1.4(B,D)
Â¶1. (C) SUMMARY. El Salvador's fiscal and liquidity problems
continue, despite Government of El Salvador (GOES)
negotiations with various international financial
institutions. The private banking sector remains liquid and
prepared for massive post-electoral capital flight, though
the threat of bank runs continues to be of concern and credit
markets have tightened (reftel A). The GOES has also not yet
resolved how to roll over its short-term debt, with $80
million needed on December 15 and at least $418 million
needed before the end of the Saca Administration on June 1
(reftel B). Vice President de Escobar has also been seeking
money from countries in the Middle East.
Â¶2. (C) The National Assembly is supposed to vote on a $500
million Inter-American Development Bank (IDB) loan package on
December 10. While that money is earmarked for repaying 2011
debt and funding new social programs, it could free up other
funds to cover Letters of Treasury ("Letes"). The Central
Bank has negotiated a separate $500 million credit line from
the IDB, though its terms of use remain unclear and it might
be too costly to use. Likewise, the Central Bank is
negotiating a contingency credit line with the International
Monetary Fund, but political concerns over conditionality
will likely prevent securing that line except in a crisis.
An arrangement with the Central American Bank for Economic
Integration (CABEI) might be the most attractive option for
GOES, but there is no certainty that CABEI will have
sufficient funds to meet Salvadoran and other regional
demands. In the current financial storm, the country is
looking to the government to restore confidence in the
economy, which could prove to be a tough task. END SUMMARY.
LIQUIDITY PROBLEMS
------------------
Â¶3. (SBU) Salvadoran Private Banking Association (ABANSA)
President Armando Arias, former Central Bank President Rafael
Barraza, and Citibank Vice President Francisco Nunez all
confirmed that the GOES rolled over its November Letters of
Treasury ("Letes") using funds from various semi-autonomous
institutions (e.g., the port authority, the water company).
Removing the institutions' funds from the private banks did
not, as Barraza had feared (reftel C), have a negative effect
on the banking system. By reducing bank deposits, however,
this maneuver also likely made the banks less likely to roll
over Letes.
Â¶4. (SBU) On November 26, Ministry of Finance Director of
Fiscal and Public Credit Policy Manuel Rosales said that the
GOES would need $80 million in short-term financing by
December 15, including rolling over $60 million in Letes and
issuing $20 million in new Letes to cover tax revenue
short-falls (reftel B). According to Ministry of Finance
figures, the GOES needs to roll over $93.4 million in Letes
in January, $92.4 million in February, $131.5 million in
March, $87.4 million in May, and $13.6 million in June.
These figures do not include any new debt to make up for lost
tax revenue. (COMMENT: The Ministry of Finance has shared
its debt information only reluctantly, and what they have
provided is often inconsistent or incomplete. END COMMENT)
Â¶5. (SBU) In addition, the GOES needs to reach an agreement by
December 11 to reimburse electricity companies $66 million of
the remaining $93.7 million in electricity subsidies from
April-October 2008. The GOES has continued to insist
publicly that it will receive this money from the Central
American Bank for Economic Integration (CABEI), though no
loan has been finalized and the Treasury Ministry's Rosales
told Econoff that CABEI cut its assistance for Letes from
$300 million to $150 million, all of which has already been
allocated. According to electricity company representatives,
the GOES will owe at least an additional $40 million in April
2009 for the electricity subsidies from October 2008-April
Â¶2009.
Â¶6. (U) According to November 30 and December 3 press reports,
Vice President Ana Vilma de Escobar asked the governments of
Qatar, Kuwait and Bahrain to buy Letes during bilateral
sidebars at a United Nations conference in Qatar. CABEI
Director for El Salvador Miguel Angel Siman was with VP de
Escobar on the trip and confirmed the request to Econoff on
December 8. He was unaware of any commitments from those
governments to purchase Letes or other Salvadoran debt, but
said they were sending the three Arab governments additional
information.
Â¶7. (C) The GOES has established a liquidity commission, and
according to former Finance Minister Hinds, President Saca
took Hinds' suggestion to include former Central Bank
President Barraza on the commission. Hinds had not, however,
seen the commission actually do anything. When asked what
the commission did, Central Bank President Luz Maria de
Portillo replied only that "it meets every Tuesday." Arias
expressed his frustration when he told Econoffs that ABANSA
had not been consulted or asked to participate in the
liquidity commission.
IDB-WB LOAN PACKAGES
--------------------
Â¶8. (SBU) The Inter-American Development Bank (IDB) approved a
$500 million loan on November 25, part of a $950 million
package of IDB and World Bank loans. While the GOES had been
given approval to negotiate the loan by unanimous vote in the
National Assembly, the final loan must still go to the
Assembly for ratification by a 2/3 majority. Ministry of
Finance Director Manuel Rosales said that the GOES planned to
present the loan to the Assembly on December 10. According
to local IDB representative Carmenza McLean, the first
tranche of $200 million should be available before the end of
Â¶2008. Central Bank President Portillo said the GOES does not
expect action on the World Bank's $450 million loan until
sometime in January 2009.
Â¶9. (C) To secure opposition support for the $950 million loan
package, the GOES negotiated an agreement with the FMLN that
$650 million ($200 from IDB, $450 from WB) would go to pay
off El Salvador's 2011 Eurobond debt and $300 million (IDB)
would be used to fund new social programs. Initial reports
from the agreement were that the money for social spending
would not be used until after the next government took office
in June 2009. On November 26, however, Ministry of Finance
Director Rosales said that the GOES would use the first
tranche of $200 million on social spending.
Â¶10. (C) IDB Rep. McLean contradicted Rosales, telling
EconCouns that the loan documents specifically provided for
the first $200 million to go to 2011 Eurobond debt repayment.
In addition, she lamented that the GOES had been slow to
provide needed information to the IDB and had not done much
to educate the National Assembly to assure passage of the
loan package by the needed super majority. McLean said the
Assembly had to approve the package on December 10 and haveit published in the
official gazette on December 1, in order
to give the IDB time to process the lan before it closed its
books for the year on Deember 18. Though, she left open the
possibilitythat other arrangements could still be made to
diburse the first tranche of $200 million by year's nd, if
the deadline was missed by only a few day.
Â¶11. (C) Most of El Salvador's 2011 Eurobond dbt is held
domestically, primarily by the semi-autonomous institutions.
Banco Agricola Executive President/former Central Bank
President Roberto Orellana and former Finance Minister Hinds
have suggested that the GOES pre-pay some of its 2011
Eurobond debt, which would free funds that could be used to
buy Letes. Hinds said Central Bank President Portillo had
affirmed that the GOES could pay off the Eurobond early
without penalty, but when Hinds suggested this plan to
Minister of Finance William Handal, he told Hinds that they
"had to wait until they could get the best possible deal for
the government." When asked on several occasions whether
this idea was feasible, Ministry of Finance Director Rosales
replied "no" but could not articulate why. (NOTE. According
to the 2011 Eurobond offer, the Eurobonds are not callable,
but the GOES is permitted to buy and retire them on the open
market. The 2011 Eurobonds were recently trading at about 94%
of face value in the Salvadoran market. END NOTE.)
IDB Credit Line
---------------
Â¶12. (SBU) The Central Bank has also negotiated a $500 million
line from the IDB liquidity facility to be used for
short-term lending for "working capital" to the "productive
sector." (NOTE: This line is still pending final approval
from the IDB board. END NOTE.) Central Bank President
Portillo stated that the credit line was for 5 years (with a
3 year grace period) at LIBOR plus 4% (with an additional
1.75% in commissions and fees). Portillo added that the
Central Bank had not yet received guidance from the IDB on
how, exactly, the credit line may be used. The Central Bank
was likely, however, to channel the money through the
state-owned Multi-Sector Investment Bank (BMI), which has
"more experience" in this type of lending.
Â¶13. (SBU) Participation by the banking sector will be
optional, and ABANSA President Arias expressed doubt that
many banks would opt to participate. While the banks had not
received the final details, the terms they had heard so far
were so restrictive and would require so much documentation
that Arias thought it would not be worth the banks' time.
Citibank VP Francisco Nunez noted that, from Citi's point of
view, the credit line was "very expensive at LIBOR plus 500
to 600 basis points" and very limited in what areas it could
be used. For instance, both Nunez and Central Bank President
Portillo did not think the credit line could be used for
construction projects. Nunez also stated that the GOES did
not seem to understand the difference between liquidity risk
and credit risk, and was attributing the tightening of credit
markets entirely to liquidity risk. Nunez was unsure whether
most banks would actually use the credit line for lending, or
if they would treat it as a contingency credit line.
Citibank, he said, had enough liquidity to meet all of its
lending needs through December, but would reevaluate its
position in January in the event of election-related capital
flight.
Â¶14. (SBU) According to Central Bank President Portillo,
because the credit line would pass through the Central Bank
to the private sector, it did not need to go to the National
Assembly. This also meant, however, that those funds could
not be used to buy Letes or other government debt. On
December 2, FMLN presidential candidate Mauricio Funes stated
that, in his view, the Central Bank did not have the
authority to obtain this credit line without approval by the
National Assembly.
IMF Credit Line
---------------
Â¶15. (C) The Central Bank is also discussing with the
International Monetary Fund (IMF) a contingency credit line
of up to $1.2 billion, but Central Bank President Portillo
said the GOES is still trying to decide what kind of IMF
assistance would be most effective. In former Central Bank
President Rafael Barraza's view, however, the decision is
actually political. Barraza stated that El Salvador likely
did not qualify for the IMF's short-term liquidity facility
and had to look at other options which require more
conditionality. Barraza said that the Saca Administration
was unlikely to sign off on anything that required
conditionality before the January and March 2009 elections,
for fear of political backlash, but the GOES would likely
complete negotiations to the point where something could be
signed immediately. This would make the assistance available
to address an emergency, but would not provide the same
confidence boost to the banking sector.
CABEI Assistance
----------------
Â¶16. (SBU) According to CABEI Director for El Salvador Siman,
CABEI has provided the Central Bank of El Salvador with a
$200 million credit line, $195 million of which has already
been disbursed. Siman said that CABEI had an additional $150
million contingency line to the Central Bank ready that the
GOES could accept should negotiations with the IMF break
down. In Siman's view, the Central Bank of El Salvador is
the most solid in Central America.
Â¶17. (SBU) In order to purchase GOES Letes, CABEI had
established a local trust (fideicomiso) and was inviting
other investors, including the IDB, to participate. Siman
stated that CABEI thought this was the "most transparent" way
to buy Letes, and hoped that a CABEI-backed trust would boost
confidence and attract other, new investors. When asked
whether CABEI could provide more funds to buy Letes beyond
the $150 million that it already provided, Siman replied that
CABEI would consider any new request from the GOES, but it
would have to be weighed against the numerous requests they
were receiving from the other Central American countries. El
Salvador currently ranks 4th out of the 5 member countries in
terms of assistance received, with less than $900 million in
total debt.
Â¶18. (SBU) Siman confirmed that the GOES and state-owned
utility CEL had not secured a loan from CABEI to cover the
outstanding electricity subsidy. CABEI and the GOES were in
talks, and CABEI was reviewing CEL's latest financials, but a
loan proposal had not gone to CABEI's directors and would not
"before January at the earliest." While CABEI normally lends
for infrastructure projects, Siman stated that they also do
"working capital" loans, which could be used to pay
subsidies. He added that, in the event CABEI did not approve
a new loan to CEL, the GOES had the right to request part of
the existing $140 million loan for the El Chapparal dam be
diverted to "working capital." "CABEI is based in Central
America, not Washington," he commented, "so we're pretty
flexible about such things."
COMMENT
-------
Â¶19. (C) El Salvador continues to face short-term liquidity
problems and its fiscal accounts will continue to be vexed by
subsidy expenses. The IDB and WB loans, if passed will
provide some needed relief, but will not necessarily resolve
either the liquidity or fiscal problems. In light of the
urgent need for immediate funds to roll over Letes, Treasury
Minister Handal's apparent reluctance to buy back 2011
Eurobonds from domestic bondholders who might then be able to
purchase Letes does not make sense. Luminaries such as
Hinds, Barraza, and former Minister of Economy Miguel Lacayo
all continue to believe that the Ministry of Finance is a
major impediment to resolving the short-term debt problem.
Minister of Finance Handal is viewed only the man who "holds
the President's pocketbook," and none of the Ministry's staff
are seen as strong figures. While Hinds remarked that he had
seen some signs President Saca was becoming more concerned,
Saca's two closest advisors, Herbert Saca and Elmer Charlaix,
are the same advisors who pushed budget-busting subsidies in
the first place. While there is a possibility that the
Liquidity Commission could persuade President Saca otherwise,
the early signs of that Commission's effectiveness are not
promising.
Â¶20. (C) The international financial crisis and next year's
elections are the two major factors affecting the Salvadoran
economy and investment climate. Saca could do a great deal to
restore confidence in the economy by coming up with a
comprehensive plan on how to address debt and credit (reftel
A) and presenting that plan to the public. Economists like
Lacayo, Luis Membreno and Hinds are saying that people are
looking to the GOES (with multilateral and other assistance)
for signs that the country can not only weather but also
stimulate the economy to emerge from the current financial
storm.
Â¶21. (C) That strategy implies two things; that Saca is
willing to face up to the issue, and he has a team in place
that can develop and execute such a plan. However, the
administration does not want to pursue any assistance (e.g.,
the IMF credit line) that requires conditionality, both for
fear of how it could be played by the FMLN in the campaign,
and because that conditionality would likely include reducing
and targeting government subsidies for electricity, gas,
water, and transportation. Given their reluctance to share
information and questionable past economic policy choices we
also question whether his current advisors are up to the
task, even if they wanted to do it.
GLAZER